February 1, 2010

New Higher Ed Budget to Affect Family Loans

President Barack Obama’s proposed budget for the 2011 fiscal year, sent to Congress yesterday, contained several contentious reforms that pundits from both political parties agree will change the landscape of higher education in America. Students at Cornell and other wealthy universities will remain unaffected, however, according to Cornell’s Director of Financial Aid, Tom Keane.

In tandem with the Student Aid and Fiscal Responsibility Act passed by the House in September and currently stuck in committee in the Senate, Obama’s proposed budget eliminates the Federal Family Education Loan (FFEL) program and replaces it with direct federal lending.

According to Keane, virtually no students come to Cornell through FFEL, which is currently responsible for 80 percent of the loans given out by the federal government every year. Through the FFEL, the federal government provides various banks with subsidies and insures the loan; this, in effect, encourages banks to lend to students at lower rates.

In 1994, Cornell opted out of this program, switching to the direct lending system. This enabled students to bypass applications to a bank and a guarantee agency, “the right decision from a student service perspective,” Keane said.

Democrats cite an estimate from the Congressional Budget Office to claim that this switch will save them $87 billion, money they hope to use to expand the Pell grant fund to a million students and turn Pell grants into an entitlement program.

Yet President of the Cornell Republicans Konstantin Drabkin ’11 references a more recent C.B.O. report that, in a letter to Senator Judd Gregg last July, accounted for “market risk.” With this qualifier, the C.B.O. appears to have done an about face to say that the reform will “increase direct spending by $39.4 billion and discretionary spending by $6.3 billion over the 2010-19 period.” It is unclear how — and if — this new report will influence the Obama plan.

Keane estimated that even though some Cornell students might see their Pell grants increased by a thousand dollars or so, this amount was “really not that significant” when compared with a $40,000 tuition fee.

Still, Cornellians have a stake in the issue, as it will affect peer institutions across the country.

Conservatives claim that replacing the FFEL with direct federal lending will only hurt the consumers — students — by “eliminating choice, competition and innovation” between loan agencies, as Republican on the House Committee on Education and Labor John Kline wrote in his opposition memo to H.R. 3221 last fall.

Drabkin took a slightly different line of opposition, stressing the potential fiscal ramifications of having “the government invade this latest industry.” He said that because “all defaults will be the responsibility of the tax payer,” the reform will swell the federal government’s deficit, citing the alternative C.B.O. estimates listed above.

Government Professor Suzanne Mettler, who is currently writing a book on the politics of higher education over the last 30 years, believes Obama’s reform will expand access to education and reduce the deficit.

She described how the well-intentioned FFEL — founded under Lyndon Johnson in 1965 — and Sallie Mae — founded to run the FFEL in 1972 — had “unintended consequences,” accidentally creating a “student loan industry trying to protect its own vested interests and shareholders on Capitol Hill.”

Mettler said that because of the government’s guarantee, banks can make their loans with zero risk. She added that this enables them to “set all sorts of term for repayment for students … penalties and fees [which become] very lucrative.”

Michael Schillawski, President of the Cornell Democrats, agreed, saying “the premise of the Republican opposition is wrong.”

He stressed that the current system is not a free market enterprise because taxpayers already fund “six out of every ten dollars spent on student loans.”

The future of these changes is uncertain, but with the recent election of Republican Scott Brown to the Senate, Democrats no longer have a filibuster proof majority to pass this education reform.

Mettler observed that Democrats might use reconciliation — a controversial budget procedure that blocks a filibuster with a 51-vote majority — to pass the Student Aid and Fiscal Responsibility Act. Since reconciliation can only be used once a year, the bill’s passage will depend on whether Democrats wish to save the procedure for a last-ditch effort to pass a health care bill.